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| Autor | Alison Makey, Tyson B. Mackey, Jay B. Barney |
| Titel | Corporate social responsibility and firm performance: investor preferences and corporate strategies |
| Zeitschrift | Academy of Management Review |
| Ausgabe | 32 |
| Jahr | 2007 |
| Nummer | 3 |
| Seiten | 817-835 |
| URL | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=816425 (preprint, slightly different to published article, which has been used for documentation) |
Literaturverz. |
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| Fußnoten | yes |
| Fragmente | 10 |
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| 11. Corporate Social Responsibility and firm performance
General implications With Mackay, Mackay, Barney debates continue to rage about whether or not firms should engage in socially responsible behavior. On the one hand, traditional economic arguments suggest that managers should make decisions that maximize the wealth of their firm’s equity holders. Managers do this by making decisions that maximize the present value of the firm’s future cash flows. To the extent that socially responsible activities are inconsistent with these economic objectives, traditional financial logic suggests that they should be avoided. Indeed, firms that engage in such activities - especially when they are very costly - may be subject to various forms of market discipline, including limited access to low-cost capital, the replacement of senior managers, and takeovers. On the other hand, some business and society scholars have argued that firms have a duty to society that goes well beyond simply maximizing the wealth of equity holders. These scholars argue that such a narrow focus can lead management to ignore other important stakeholders - including employees, suppliers, customers, and society at large - and that sometimes the interests of these other stakeholders should supersede the interests of a firm’s equity holders in managerial decision making, even if this reduces the present value of the firm’s cash flows. One way to resolve this conflict is to observe that at least some forms of socially responsible behavior may actually improve the present value of a firm’s future cash flows and, thus, may be consistent with the wealth-maximizing interests of the firm’s equity holders. For example, socially responsible behavior can enable a firm to differentiate its products in its product market, can enable a firm to avoid costly governmentimposed fines, and can act to reduce a firm’s exposure to risk. All of these socially responsible actions can increase the present value of a firm’s future cash flows and are therefore consistent with maximizing the wealth of the firm’s equity holders. However, from a broader theoretical perspective, the entire effort to discover how socially responsible activities can increase the present value of a firm’s future cash flows is problematic. After all, the essential point of many business and society scholars is that the interests of a firm’s equity holders sometimes need to be set aside in favor of the interests of the firm’s other stakeholders. That is, according to social responsibility theorists, firms should sometimes engage in activities that benefit employees, suppliers, customers, and society at large, even if those activities reduce the present value of the cash flows generated by the firm. Focusing the study of corporate social responsibility on those actions that increase the present value of a firm’s cash flows fails to address this central theme in the corporate social responsibility literature. In this context, not just examples of socially responsible actions that can have a positive impact on a firm’s cash flows - so-called profit-maximizing “ethics” - are required but, rather, a theory that suggests the conditions under which firms will engage in socially responsible activities, even if those activities reduce the present value of a firm’s cash flows - so-called costly philanthropy. In this paper we propose such a theory. This theory builds on the simple observation that equity holders may sometimes have interests besides simply maximizing their wealth when they make their investment decisions. Sometimes, they may want the firms they invest in to pursue socially responsible activities, even if these activities reduce the present value of the cash flows generated by these firms. Assumptions and Definitions Before developing the model, it is helpful to define its key terms and specify its central assumptions. It may be noted that much of the current confusion in the Corporate Social Responsibility Literature is due to a lack of clarity about definitions and assumptions. |
Debates continue to rage about whether or not firms should engage in socially responsible behavior. On the one hand, traditional economic arguments suggest that managers should make decisions that maximize the wealth of their firm’s equity holders (Friedman, 1962). Managers do this by making decisions that maximize the present value of a firm’s future cash flows (Copeland, Murrin, & Koller, 1994). To the extent that socially responsible activities are inconsistent with these economic objectives, traditional financial logic suggests that they should be avoided. Indeed, firms that engage in such activities — especially when they are very costly — may be subject to various forms of market discipline, including limited access to low cost capital, the replacement of senior managers, and takeovers (Jensen & Meckling, 1976).1
On the other hand, some business and society scholars have argued that firms have a duty to society that goes well beyond simply maximizing the wealth of equity holders (Swanson, 1999; Whetten, Rands, & Godfrey, 2001). These scholars argue that such a narrow focus can lead management to ignore other important stakeholders — including employees, suppliers, customers, and society at large — and that sometimes the interests of these other stakeholders should supersede the interests of a firm’s equity holders in managerial decision making, even if this reduces the present value of the firm’s cash flows (Clarkson, 1995; Donaldson & Preston, 1995; Freeman, 1984; Mitchell, Agle, & Wood, 1997; Paine, 2002; Wood & Jones, 1995). One way to resolve this conflict is to observe that at least some forms of socially responsible behavior may actually improve the present value of a firm’s future cash flows and thus may be consistent with the wealth maximizing interests of the firm’s equity holders. For example, socially responsible behavior can enable a [p. 818] firm to differentiate its products in its product market (McWilliams & Siegel, 2001; Waddock & Graves, 1997), can enable a firm to avoid costly governmentimposed fines (Belkaoui, 1976; Bragdon & Marlin, 1972; Freedman & Stagliano, 1991; Shane & Spicer, 1983; Spicer, 1978), and can act to reduce a firm’s exposure to risk (Godfrey, 2004). All of these socially responsible actions can increase the present value of a firm’s future cash flows and are therefore consistent with maximizing the wealth of the firm’s equity holders. However, from a broader theoretical perspective, the entire effort to discover how socially responsible activities can increase the present value of a firm’s future cash flows is problematic. After all, the essential point of many business and society scholars is that the interests of a firm’s equity holders sometimes need to be set aside in favor of the interests of the firm’s other stakeholders (Banfield, 1985; Carroll, 1995; Windsor, 2001). That is — according to social responsibility theorists — firms should sometimes engage in activities that benefit employees, suppliers, customers, and society at large, even if those activities reduce the present value of the cash flows generated by the firm (Mitchell et al, 1997; Paine, 2002; Wood & Jones, 1995). Focusing the study of corporate social responsibility on those actions that increase the present value of a firm’s cash flows fails to address this 2 central theme in the corporate social responsibility literature (Windsor, 2001). In this context, not just examples of socially responsible actions that can have a positive impact on a firm’s cash flows — so-called profit-maximizing “ethics” (Windsor, 2001) — are required but, rather, a theory that suggests the conditions under which firms will engage in socially responsible activities even if those activities reduce the present value of a firm’s cash flows — so-called “costly philanthropy” (Windsor, 2001). In this paper we propose such a theory. This theory builds on the simple observation that equity holders may sometimes have interests besides simply maximizing their wealth when they make their investment decisions. Sometimes, they may want the firms they invest in to pursue socially responsible activities, even if these activities reduce the present value of the cash flows generated by these firms. ASSUMPTIONS AND DEFINITIONS Before developing the model, it is helpful to define of its key terms and specify its central assumptions. Margolis & Walsh (2003) have noted that much of the current confusion in the corporate social responsibility literature is due to a lack of clarity about definitions and assumptions. |
The source is mentioned at the beginning of the page, but nothing has been marked as citation. Line 1 is copied from the main title of the source ("Corporate Social Responsibility and Firm Performance". The author also copies the sentence: "In this paper we propose such a theory." |
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| What Is Socially Responsible Behavior?
A wide variety of definitions of Corporate Social Responsibility have been proposed in the literature. While these definitions vary in detail, many focus on voluntary firm actions designed to improve social or environmental conditions. This is the definition of corporate social responsibility we adopt here. Of course, within this broader definition, different stakeholders may have different preferences for specific socially responsible activities they would like to see their firm invest in. Moreover, these preferences may vary as the currency of social issues evolves over time. However, as long as a firm’s actions are consistent with this general definition of social responsibility - that is, as long as they are voluntary and designed to improve social or environmental conditions — they are considered socially responsible for the purposes of the model developed here. The specific decision-making context modelled here focuses on determining the total demand for investment opportunities in firms engaging in specific socially responsible activities; the current supply of those opportunities in the market; and whether current supply is less than, equal to, or greater than demand. In this sense, the opportunity to invest in a firm that is engaging in specific socially responsible activities can be thought of as a “product” that is sold by firms to potential equity investors as “customers.” Of course, equity holders as “customers” for opportunities to invest in socially responsible firms may vary in the kinds of corporate social responsible activities they would. What Is Firm Performance? A wide variety of definitions of firm performance have also been proposed in the literature. Both accounting and market definitions have been used to study the relationship between corporate social responsibility and firm performance. However, since most social responsibility scholars seek to understand the ways that socially responsible corporate activities can create or destroy shareholder wealth, market definitions of firm performance seem likely to be more appropriate than accounting definitions of firm performance in this context. In fact, in the model developed here, we adopt such a market definition of firm performance by focusing on how socially responsible corporate activities affect a firm’s market value. Market value is defined as the price of a firm’s equity multiplied by the number of its shares outstanding. Thus, our model addresses the following question: Supposing managers seek to maximize the market value of their firm in their decision making, will they ever choose to invest in socially responsible activities that reduce the present value of their firm’s cash flows? Of course, there is some controversy about the assumption that managers seek to maximize the market value of their firms in their decision making. Some have suggested that under conditions of uncertainty and imperfect information, managers cannot know, ex ante, how to maximize the market value of their firm. Others have suggested that managerial interests are often inconsistent with maximizing the value of a firm. However, some of these same authors argue that managers who fail to maximize the market value of their firm, ex post, may be subject to a variety of market sanctions, and, thus, the assumption that managers seek to maximize the value of their firm is a useful approximation. For our purposes here, whether or not managers can or do seek to maximize the value of their firm in their decision making is less important. Rather, we conduct a simple “thought experiment”: since corporate social responsibility scholars have been interested in understanding the economic consequences for a firm implementing socially responsible activities, we develop a model where managers are assumed to focus on maximizing the market value of their firm, and we examine the impact of socially responsible activities on this market value. In this sense, the assumption that managers seek to maximize the market value of their firm in their decision making provides a standard against which to evaluate the economic consequences of engaging in socially responsible activities that reduce the present value of a firm’s cash flows. |
What Is Socially Responsible Behavior?
A wide variety of definitions of corporate social responsibility have been proposed in the literature (Margolis & Walsh, 2003). While these definitions vary in detail, many focus on voluntary firm actions designed to improve social or environmental conditions (Aguilera, Rupp, Williams, & Ganapathi, 2004; Davis, 1973; Wood, 1991a; 1991b; Wood & Jones, 1995; Waddock, 2004). This is the definition of corporate social responsibility we adopt here. Of course, within this broader definition, different stakeholders may have different preferences for specific socially responsible activities they would like to see their firm invest in (Grass, 1999). Moreover, these preferences may vary as the currency of social issues evolves over time (Clarkson, 1995; Davis, 1973; Moskowitz, 1975; Wartick & Cochran, 1985; Wood, 1991a). However, as long as a firm’s actions are consistent with this general definition of social responsibility — that is, as long as they are voluntary and designed to improve social or environmental conditions — they are considered socially responsible for purposes of the model developed here. The specific decision making context modeled here focuses on determining the total demand for investment opportunities in firms engaging in specific socially responsible activities, the current supply of those opportunities in the market, and whether current supply is less than, equal to, or greater than demand. In this sense, the opportunity to invest in a firm that is engaging in specific socially responsible activities can be thought of as a “product” that is sold by firms to potential equity investors as “customers.”2 [p. 819] What Is Firm Performance? A wide variety of definitions of firm performance have also been proposed in the literature (Barney, 2002). Both accounting and market definitions have been used to study the relationship between corporate social responsibility and firm performance (Orlitzky, Schmidt, & Rynes, 2003). However, since most social responsibility scholars seek to understand the ways that socially responsible corporate activities can create or destroy shareholder wealth, market definitions of firm performance seem likely to be more appropriate than accounting definitions of firm performance in this context (Margolis and Walsh, 2001). In fact, in the model developed here, we adopt such a market definition of firm performance by focusing on how socially responsible corporate activities affect a firm’s market value. Market value is defined as the price of a firm’s equity multiplied by the number of its shares outstanding. Thus, our model addresses the following question: Supposing managers seek to maximize the market value of their firm in their decision making (Copeland et al., 1994; Friedman, 1962), will they ever choose to invest in socially responsible activities that reduce the present value of their firm’s cash flows? Of course, there is some controversy about the assumption that managers seek to maximize the market value of their firms in their decision making. Some have suggested that under conditions of uncertainty and imperfect information, managers cannot know, ex ante, how to maximize the market value of their firm (Alchian, 1950). Others have suggested that managerial interests are often inconsistent with maximizing the value of a firm (Jensen & Meckling, 1976). However, some of these same authors argue that managers who fail to maximize the market value of their firm, ex post, may be subject to a variety of market sanctions (Jensen & Meckling, 1976), and, thus, the assumption that managers seek to maximize the value of their firm is a useful approximation. For our purposes here, whether or not managers can or do seek to maximize the value of their firm in their decision making is less important. Rather, we conduct a simple “thought experiment”: since corporate social responsibility scholars have been interested in understanding the economic consequences for a firm implementing socially responsible activities, we develop a model where managers are assumed to focus on maximizing the market value of their firm, and we examine the impact of socially responsible activities on this market value. In this sense, the assumption that managers seek to maximize the market value of their firm in their decision making provides a standard against which to evaluate the economic consequences of engaging in socially responsible activities that reduce the present value of a firm’s cash flows. 2 Of course, equity holders as “customers” for opportunities to invest in socially responsible firms may vary in the kinds of corporate social responsible activities in which they would prefer to invest. [...] |
The source is given on the preceding and on the following page. Note that one sentence has been copied incompletely: "firms may vary in the kinds of corporate social responsible activities they would" is reproduced without the proper ending "they would prefer to invest", which is found in the original. |
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| [Yet while we examine the market value conse]quences of firms’ pursuit of socially responsible activities that reduce the present value of their cash flows, we do not assume that maximizing the present value of a firm’s cash flows and maximizing a firm’s market value are equivalent. Such an assumption is only justifiable if all of a firm’s current and potential equity holders are solely interested in maximizing their wealth in making their investment decisions. If, however, at least some of these investors have interests besides simply maximizing their wealth in making investment decisions, then “maximizing the present value of a firm’s cash flows” and “maximizing firm value” are no longer equivalent concepts.
Market Efficiency Assumptions The model presented here also assumes that capital markets are semi-strong efficient. This means that publicly available information about the perceived value of a firm’s assets will, on average, be reflected in the market price of those assets. Semi-strong efficiency, in particular, implies that if firms engage in specific socially responsible activities in a public way, current and potential equity holders will be aware of both the nature of these activities and their impact on the present value of a firm’s future cash flows and will, on average, prefer to invest in. The model developed here adopts the simplifying assumption that these equity investors all have a preference for investing in firms pursuing a particular socially responsible activity-although this specific activity is not important in the model. Without loss of generality, this preference can also be interpreted as a preference for a particular bundle of socially responsible activities. This simplifying assumption is relaxed in the model extensions section of the paper. Mackey, Mackey, and Barney adjust their valuation of a firm’s equities accordingly. There is substantial evidence that U.S. capital markets are, overall, semi-strong efficient. This does not mean that the value of a firm’s equity always equals the true underlying value of the firm; certainly, there is a great deal of private information about the value of those assets and investor decisions are often systematically nonrational and affected by emotions. However, semi-strong efficiency does suggest that whatever public information exists about the value of a firm’s assets is, on average, likely to be reflected in the price of those assets. In this context semi-strong efficiency suggests that when a firm publicly pursues socially responsible activities that reduce the present value of its cash flows, current and potential investors will factor these actions and their consequences into decisions about whether or not to buy or sell this firm’s stock. Socially Responsible Activities and Firm Cash Flows Finally, while acknowledging that some socially responsible activities can sometimes have a positive impact on the present value of afirm’s [sic] cash flows , our model examines the consequences of only those socially responsible activities that reduce the present value of a firm’s cash flows. In this way the model focuses on a central theoretical issue raised by those who study corporate social responsibility that managers should sometimes abandon efforts to maximize the present value of their firm’s future cash flows in favor of socially responsible activities that reduce the value of those cash flows. Obviously, identifying socially responsible activities that increase the present value of a firm’s cash flows is interesting in its own right. However, no new theory is required to explain why firms will pursue such activities, once identified. Such actions are consistent with received economic and financial theories of firm behavior. But new theory is required to explain why firms might pursue socially responsible actions that reduce the present value of their cash flows. Focusing the model only on these situations helps develop this critical aspect of the theory of corporate social responsibility. |
Yet while we examine the market value consequences of firms' pursuit of socially responsible activities that reduce the present value of their cash flows, we do not assume that maximizing the present value of a firm’s cash flows and maximizing a firm’s market value are equivalent. Such an assumption is only justifiable if all of a firm’s current and potential equity holders are solely interested in maximizing their wealth in making their investment decisions. If, however, at least some of these investors have interests besides simply maximizing their wealth in making investment decisions, then “maximizing the present value of a firm’s cash flows” and “maximizing firm value” are no longer equivalent concepts.
Market Efficiency Assumptions The model presented here also assumes that capital markets are semi-strong efficient (Fama, 1970). This means that publicly available information about the perceived value of a firm’s assets will, on average, be reflected in the market price of those assets. Semi-strong efficiency, in particular, implies that if firms engage in specific socially responsible activities in a public way, current and potential equity holders will be aware of both the nature of these activities and their impact on the present value of a firm’s future cash flows, and will, on average, [p. 820] adjust their valuation of a firm’s equities accordingly. There is substantial evidence that U.S. capital markets are, overall, semi-strong efficient (Copeland et al., 1994). This does not mean that the value of a firm’s equity always equals the true underlying value of the firm; certainly, there is a great deal of private information about the value of those assets (Fama, 1970) and investor decisions are often systematically nonrational (Tversky & Kahneman, 1974) and affected by emotions (Schiller, 1999; Shefrin, 2000; Thaler, 1987a,b). However, semi-strong efficiency does suggest that whatever public information exists about the value of a firm’s assets is, on average, likely to be reflected in the price of those assets (Fama, 1998)3. In this context, semi-strong efficiency suggests that when a firm publicly pursues socially responsible activities that reduce the present value of its cash flows, current and potential investors will factor these actions and their consequences into decisions about whether or not to buy or sell this firm’s stock. Socially Responsible Activities and Firm Cash Flows Finally, while acknowledging that some socially responsible activities can sometimes have a positive impact on the present value of a firm’s cash flows (Godfrey, 2004; McWilliams & Siegel, 2001; Waddock & Graves, 1997; Godfrey, 2004), our model examines the consequences of only those socially responsible activities that reduce the present value of a firm’s cash flows.4 In this way, the model focuses on a central theoretical issue raised by those who study corporate social responsibility — that managers should sometimes abandon efforts to maximize the present value of their firm’s future cash flows in favor of socially responsible activities that reduce the value of those cash flows. Obviously, identifying socially responsible activities that increase the present value of a firm’s cash flows is interesting in its own right (Godfrey, 2004; McWilliams & Siegel, 2001; Waddock & Graves, 1997). However, no new theory is required to explain why firms will pursue such activities, once identified. Such actions are consistent with received economic and financial theories of firm behavior. But new theory is required to explain why firms might pursue socially responsible actions that reduce the present value of their cash flows. Focusing the model only on these situations helps develop this critical aspect of the theory of corporate social responsibility. 2 [...] prefer to invest in. The model developed here adopts the simplifying assumption that these equity investors all have a preference for investing in firms pursuing a particular socially responsible activity - although this specific activity is is not important in the model. Without loss of generality, this preference can also be interpreted as a preference for a particular bundle of socially responsible activities. This simplifying assumption is relaxed in the model extensions section of the paper. |
The source is mentioned in the text and on the previous pages, but without the slightest indication that the entire page is taken from it. It is worth having a look at the outline of the source:
One can see that at the end of page 819 -- in the middle of a sentence -- the part of footnote 2 that is on page 819 is copied, followed by page 820, where one finds the end of the sentence that has been started on page 819. This pattern is naturally created if the text is selected across the turn of the page in the PDF version of the source and then copied and pasted. In order to give the second part of that sentence a subject, "Mackey, Mackey, and Barney" has been inserted, although the original sentence rather refers to "current and potential equity holders", which leads to a total confusion of the meaning of the original text. |
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| Mackey, Mackey and Barney’s model
In this section they present a simple model of the supply of and demand for opportunities to invest in socially responsible firms. They use this model to describe the impact that beginning or ending socially responsible activities that reduce the present value of a firm’s cash flows will have on the firm’s market value. As is always the case, they adopt a variety of simplifying assumptions. Many of these assumptions are technical in nature and do not have an impact on the conclusions drawn from the model. Some are more substantive in nature and might have an impact on these conclusions. However, several of these substantive assumptions are relaxed, and the conclusions of the model are reexamined. While relaxing these assumptions does generate important insights, it does not affect the model’s central conclusion: the impact of socially responsible activities that reduce the present value of a firm’s cash flows on a firm’s market value depends on the supply of and demand for opportunities to invest in these types of firms. Implications and discussion The central assertion of Mackey, Mackey and Barney’s[21b, p.823,824] model is that the opportunity to invest in a firm engaging in socially responsible activities is a “product” firms sell to current and potential investors. Sometimes, current and potential equity holders may prefer to invest in firms pursuing such activities, even if those activities reduce the present value of the firms’ cash flows. The central conclusion of Mackey, Mackey and Barney is that the supply of and demand for these investment opportunities determine when socially responsible activities that reduce the present value of a firm’s cash flows will be positively or negatively related to that firm’s market value. Beyond this central assertion and conclusion, the arguments developed here have a variety of other empirical, theoretical, and practical implications. Empirical Implications Overall, the model suggests that there will be a positive correlation between firm choices about investing in socially responsible activities and firm value. This is because the model adopts the assumption that managers make these choices - to begin socially responsible activities, to cease socially responsible activities, or to maintain their current strategies whether they are socially responsible or not - in a way that maximizes the market value of a firm. Recent reviews of the empirical corporate social responsibility literature generally are consistent with this expectation although it may be suggested that the empirical results, while positive overall, are nevertheless mixed. However, the model developed here suggests that efforts to examine the “overall” correlation between socially responsible activities and firm performance may be less interesting than examining the relationship between the supply and demand conditions under which these decisions are made and a firm’s market value. Sometimes, beginning socially responsible activities will increase a firm’s market value; sometimes it will reduce its market value. Sometimes, ending socially responsible activities will decrease a firm’s market value; sometimes it will increase its market value. And, sometimes, continuing current socially responsible activities - by either continuing to invest in these activities or continuing to not invest in these activities – will increase a firm’s market value; sometimes it will decrease a firm’s market value. Only by examining the supply of and demand for socially responsible investment opportunities at the time these decisions are made can the relationship between a firm’s social responsibility strategies and its market value be understood. Of course, it will often be difficult to directly measure the supply of and demand for socially responsible investment opportunities. However, it may be possible to develop surrogate measures of these concepts. For example, changes in the number of firms who score high on various aggregate measures of social responsibility might indicate changes in the supply of so[cially responsible investment opportunities.] |
THE MODEL
In this section we present a simple model of the supply of and demand for opportunities to invest in socially responsible firms. We use this model to describe the impact that beginning or ending socially responsible activities that reduce the present value of a firm’s cash flows will have on the firm’s market value. As is always the case, we adopt a variety of simplifying assumptions. Many of these assumptions are technical in nature and do not have an impact on the conclusions drawn from the model. Some are more substantive in nature and might have an impact on these conclusions. However, later in the paper, several of these substantive assumptions are relaxed, and the conclusions of the model are reexamined. While relaxing these assumptions does generate important insights, it does not affect the model’s central conclusion: the impact of socially responsible activities that reduce the present value of a firm’s cash flows on a firm’s market value depends on the supply of and demand for opportunities to invest in these types of firms. [page 830:] IMPLICATIONS AND DISCUSSION The central assertion of this paper is that the opportunity to invest in a firm engaging in socially responsible activities is a “product” firms sell to current and potential investors. Sometimes, current and potential equity holders may prefer to invest in firms pursuing such activities, even if those activities reduce the present value of the firms’ cash flows. The central conclusion of this paper is that the supply of and demand for these investment opportunities determine when socially responsible activities that reduce the present value of a firm’s cash flows will be positively or negatively related to that firm’s market value. Beyond this central assertion and conclusion, the arguments developed here have a variety of other empirical, theoretical, and practical implications. We examine some of these other implications below.11 Empirical Implications Overall, the model suggests that there will be a positive correlation between firm choices about investing in socially responsible activities and firm value. This is because the model adopts the assumption that managers make these choices — to begin socially responsible activities, to cease socially responsible activities, or to maintain their current strategies whether they are socially responsible or not — in a way that maximizes the market value of a firm. Recent reviews of the empirical corporate social responsibility literature generally are consistent with this expectation (Orlitzky et al., 2003), although Margolis and Walsh (2003) suggest that the empirical results, while positive overall, are nevertheless mixed.13 However, the model developed here suggests that efforts to examine the “overall” correlation between socially responsible activities and firm performance may be less interesting than examining the relationship between the supply and demand conditions under which these decisions are made and a firm’s market value. Sometimes, beginning socially responsible activities will increase a firm’s market value; sometimes it will reduce its market value. Sometimes, ending socially responsible activities will decrease a firm’s market value; sometimes it will increase its market value. And, sometimes, continuing current socially responsible activities — by either continuing to invest in these activities or continuing to not invest in these activities — will increase a firm’s market value; sometimes it will decrease a firm’s market value. Only by examining the supply of and demand for socially responsible investment opportunities at the time these decisions are made can the relationship between a firm’s social responsibility strategies and its market value be understood. Of course, it will often be difficult to directly measure the supply of and demand for socially responsible investment opportunities. However, it may be possible to develop surrogate measures of these concepts. For example, changes in the number of firms who score high on various aggregate measures of social responsibility might indicate changes in the supply of socially responsible investment opportunities. |
The source is mentioned at the beginning of the page. The author appears to summarise or paraphrase some of the source's findings. The reader would not expect this to be taken verbatim from the source. |
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| [For example, changes in the number of firms who score high on various aggregate measures of social responsibility might indicate changes in the supply of so-]cially responsible investment opportunities. Also, changes in the total dollars invested in socially responsible mutual funds as a percentage of the total dollars invested in all mutual funds might be an indicator of changes in total demand for socially responsible investment opportunities. Public opinion polls on the importance of various social issues in an economy might also provide some indication of the level of demand for socially responsible investment opportunities. Whatever measures are ultimately developed, the model presented here suggests that understanding the relationship between the supply of and demand for socially responsible investment opportunities is central to understanding the relationship between socially responsible activities and firm performance, at least as measured by a firm’s market value.
Theoretical Implications The model also has a variety of theoretical implications, both for the study of firm value more broadly and for the study of the relationship between corporate social responsibility and firm value. Decoupling cash flow and firm market value. Traditional financial logic suggests that firms maximize their market value by maximizing the present value of their cash flows. This link between a firm’s market value and the present value of its cash flows is based on the often unstated assumption that all of a firm’s equity holders have the same interests: to see their wealth maximized in making their investment decisions. However, by recognizing that some equity holders may sometimes have interests besides simply maximizing their wealth in making their investment decisions, we decouple “maximizing a firm’s market value” from “maximizing the present value of a firm’s cash flows.” Here, a firm’s market value is determined by the supply of and demand for the kind of investment opportunities created by the firm’s strategies - in this case, the opportunity to invest in firms implementing different corporate social responsibility strategies. In fact, there is some reason to believe that at least some current and potential equity investors may be willing to sacrifice some of their wealth-maximizing interests to invest in firms pursuing socially responsible activities. For example, there continues to be significant and steady demand for mutual funds that specialize in investing in firms that meet certain corporate social responsibility criteria. Indeed, in 2003 about one out of every ten dollars under professional management in the United States was invested in these kinds of mutual funds. Moreover, those who invest in these funds often pay a financial penalty for doing so. This penalty can be as high as 3.5 percent for actively managed socially responsible mutual funds. Thus, at least some investors are apparently willing to invest in firms that engage in socially responsible activities even though these investments may generate lower returns than investments without regard to a firm’s socially responsible activities. It is this demand for opportunities to invest in socially responsible firms, and its relationship to the supply of these investment opportunities, that determines the market value of a firm. Thus, even though the present value of the cash flows generated by socially responsible firms may suffer, the market value of these firms can still increase. Managerial values and socially responsible investments. This analysis also has implications for the study of the relationship between senior managers and socially responsible activities. In particular, it suggests that senior managers do not have to have particularly strong or unusual moral or value-based commitments to lead their firms to engage in socially responsible activities that reduce the present value of their cash flows. Rather, as long as demand for socially responsible investment opportunities is greater than supply, managers looking to maximize the market value of their firm will find it in their self-interest to make such investments. Managerial or corporate altruism is not required to explain why firms may sometimes make these kinds of investments. Indeed, throughout this paper we [adopt the standard economic assumption that firms are trying to maximize their market value.] |
For example, changes in the number of firms who score high on various aggregate measures of social responsibility might indicate changes in the supply of socially responsible investment opportunities. Also, changes in the total dollars invested in socially responsible mutual funds as a percentage of the total dollars invested in all mutual funds might be an indicator of changes in total demand for socially responsible investment opportunities. Public opinion polls on the importance of various social issues in an economy might also provide some indication of the level of demand for socially responsible investment opportunities. Whatever measures are ultimately developed, the model presented here suggests that understanding the relationship between the supply of and demand for socially responsible investment opportunities is central to understanding the relationship between socially responsible activities and firm performance, at least as measured by a firm’s market value.
[p. 831] Theoretical Implications The model also has a variety of theoretical implications, both for the study of firm value more broadly and for the study of the relationship between corporate social responsibility and firm value. DeCoupling Cash Flow and Firm Market Value. Traditional financial logic suggests that firms maximize their market value by maximizing the present value of their cash flows (Copeland et al., 1994). This link between a firm’s market value and the present value of its cash flows is based on the often unstated assumption that all of a firm’s equity holders have the same interests—to see their wealth maximized in making their investment decisions (Brealey & Myers, 2003). However, by recognizing that some equity holders may sometimes have interests besides simply maximizing their wealth in making their investment decisions, this paper decouples “maximizing a firm’s market value” from “maximizing the present value of a firm’s cash flows.” Here, a firm’s market value is determined by the supply of and demand for the kind of investment opportunities created by a firm’s strategies—in this case, the opportunity to invest in firms implementing different corporate social responsibility strategies. In fact, there is some reason to believe that at least some current and potential equity investors may be willing to sacrifice some of their wealth maximizing interests to invest in firms pursuing socially responsible activities. For example, there continues to be significant and steady demand for mutual funds that specialize in investing in firms that meet certain corporate social responsibility criteria. Indeed, in 2003, one out of every ten dollars under professional management in the United States was invested in these kinds of mutual funds (Social Investment Forum, 2005). Moreover, those that invest in these funds often pay a financial penalty for doing so. This penalty can range as high as 3.5% for actively managed socially responsible mutual funds (Geczy, Stanbaugh, & Levin, 2003). Thus, at least some investors are apparently willing to invest in firms that engage in socially responsible activities, even though these investments may generate lower returns than investing without regard to a firm’s socially responsible activities. It is this demand for opportunities to invest in socially responsible firms, and its relationship to the supply of these investment opportunities, that determines the market value of a firm. Thus, even though the present value of the cash flows generated by socially responsible firms may suffer, the market value of these firms can still increase. Managerial Values and Socially Responsible Investments. This analysis also has implications for the study of the relationship between senior managers and socially responsible activities. In particular, it suggests that senior managers do not have to have particularly strong or unusual moral or value-based commitments to lead their firms to engage in socially responsible activities that reduce the present value of their cash flows. Rather, as long as demand for socially responsible investment opportunities is greater than supply, managers looking to maximize the market value of their firm will find it in their self interest to make such investments. Managerial or corporate altruism is not required to explain why firms may sometimes make these kinds of investments.14 Indeed, throughout this paper, the standard economic assumption—that firms are trying to maximize their market value—is adopted. 14 Although managerial morality is not required to motivate corporate social responsibility in the model we present here, such considerations may nevertheless influence firm decisions concerning such activities (Aguilera et al., 2007; Schneider, Oppegaard, Zollo, & Huy, 2005). |
The source is given on p. 58 f. References from the source were removed. |
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| [Managerial or corporate altruism is not required to explain why firms may sometimes make these kinds of investments. Indeed, throughout this paper we] adopt the standard economic assumption that firms are trying to maximize their market value. Because firms are profit maximizing, they are willing to change their type - from socially responsible to traditional profit maximizing and back - to the extent that these actions maximize their market value. In other words, this is a theory of social responsibility that does not depend on the existence of agency conflicts between a firm’s managers and its equity holders.
Practical Implications Finally, the theory developed here has practical implications, both for those charged with making decisions about whether or not invest in socially responsible activities—managers—and those who would like to see the absolute level o [sic] such investments in society increase. The managerial task. At first, the task managers face in firms contemplating whether or not to change their social responsibility policies seems daunting. After all, in the model, managers are required to estimate the supply of socially responsible investment opportunities in an economy and the demand for these investment opportunities, and then evaluate whether or not they should change their social responsibility policies accordingly. While daunting, this task is actually not materially different from the task managers face when estimating the supply of and demand for any of their products or services in the product market. While the product - socially responsible investment opportunities - and the market - current and potential equity investors - are different, the essential challenge of discovering the level of supply and demand is very similar. Thus, it would not be surprising to see managers adopt many of the same mechanisms and tools they use to gauge supply and demand in the product market to gauge supply and demand in the market for socially responsible investment opportunities. For example, firms often use customer focus groups and product tests to estimate demand in the product market. In the market for socially responsible investment opportunities, it is likely that firms will use focus groups with current and potential investors, along with smaller tentative changes in their social responsibility policies, to estimate the demand for these types of investment opportunties [sic]. Ascertaining the current level of supply of these investment opportunities may be more difficult. Managers can attempt to measure this supply through benchmarking the activities and disclosures of their product market and equity market competitors. Indeed, it seems reasonable to expect that the relationship between the supply of and demand for socially responsible investment opportunities will change over time. In some economic conditions - for example, when there are significant earnings pressures and large numbers of unfriendly takeovers—there may well be a shortage of socially responsible investment opportunities. In other settings there may be an excess number of these investment opportunities. While at first the decision about whether or not to invest in socially responsible activities seems very complex, the model presented here does suggest a way that these decisions can be significantly simplified. In particular, the model suggests that the only time a firm seeking to maximize its market value should change its social responsibility policies is when either the demand for or the supply of these investment opportunities changes dramatically. Thus, managers need not directly estimate the size of this demand or supply - only significant changes in these parameters. Shifts in demand for these investment opportunities will often reflect specific exogenous shocks in the economy. Thus, for example, when the government in South Africa abandoned its apartheid principles, socially responsible activities that supported a ban on business in South Africa were no longer in demand. Obviously, in this kind of setting, continuing to maintain these policies, because they reduced the present value of a firm’s cash flows without any compensating firm value advantages, would have reduced a firm’s market value. More recently, various business scandals may have increased demand for socially responsible activities, as investors look to put their money into companies whose management they respect [and trust.] |
Managerial or corporate altruism is not required to explain why firms may sometimes make these kinds of investments.14
Indeed, throughout this paper, the standard economic assumption that firms are trying to maximize their market value. Because firms are profit maximizing, they are willing to change their type—from socially responsible to traditional profit maximizing and back—to the extent that these actions maximize a firm’s market value. In other words, this is a theory of social responsibility that does not depend on the existence of agency conflicts between a firm’s managers and its equity holders (Wright & Ferris, 1997). Practical Implications Finally, the theory developed here has practical implications, both for those charged with making decisions about whether or not invest in socially responsible activities—managers—and those that would like to see the absolute level of such investments in society increase. [p. 832] The Managerial Task. At first, the task facing managers in firms contemplating whether or not to change their social responsibility policies seems daunting. After all, in the model, managers are required to estimate the supply of socially responsible investment opportunities in an economy, the demand for these investment opportunities, and then evaluate whether or not they should change their social responsibility policies accordingly. While daunting, this task is actually not materially different than the task managers face when estimating the supply of and demand for any of their products or services in the product market. While the product—socially responsible investment opportunities—and the market—current and potential equity investors—are different, the essential challenge of discovering the level of supply and demand is very similar. Thus, it would not be surprising to see managers adopt many of the same mechanisms and tools they use to gauge supply and demand in the product market to gauge supply and demand in the market for socially responsible investment opportunities. For example, firms often use customer focus groups and product tests to estimate demand in the product market. In the market for socially responsible investment opportunities, it is likely that firms will use focus groups with current and potential investors, along with smaller tentative changes in their social responsibility policies, to estimate the demand for these types of investment opportunities. Ascertaining the current level of supply of these investment opportunities may be more difficult. Managers can attempt to measure this supply through benchmarking the activities and disclosures of their product market and equity market competitors. Indeed, it seems reasonable to expect that the relationship between the supply and demand for socially responsible investment opportunities will change over time. In some economic conditions, e.g., when there are significant earnings pressures and large numbers of unfriendly takeovers, there may well be a shortage of socially responsible investment opportunities. In other settings, there may be an excess number of these investment opportunities. While, at first, the decision about whether or not to invest in socially responsible activities seems very complex, the model presented here does suggest a way that these decisions can be significantly simplified. In particular, the model suggests that the only time a firm seeking to maximize its market value should change its social responsibility policies is when either the demand for or the supply of these investment opportunities changes dramatically. Thus, managers need not directly estimate the size of this demand or supply—only significant changes in these parameters. Shifts in demand for these investment opportunities will often reflect specific exogenous shocks in the economy. Thus, for example, when the government in South Africa abandoned its apartheid principles, socially responsible activities that supported a ban on business in South Africa were no longer in demand. Obviously, in this kind of setting, continuing to maintain these policies, because they reduced the present value of a firm’s cash flows without any compensating firm value advantages, would have reduced a firm’s market value. More recently, various business scandals may have increased demand for socially responsible activities, as investors look to put their money into companies whose management they respect and trust. 14 Although, managerial morality is not required to motivate corporate social responsibility in the model presented in this paper, such considerations may, nevertheless, influence firm decisions concerning such activities (Aguilera, Rupp, Williams, & Ganapathi, 2005; Schnedier, Oppegaard, Zollo, & Huy, 2005). |
The source is given on pp 58 f. |
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| [More recently, various business scandals may have increased demand for socially responsible activities, as investors look to put their money into companies whose management they respect] and trust. Firms can also create their own “exogenous hocks” [sic] by becoming more international in scope. While equity holders in one country market may have one set of preferences for investing in socially responsible firms, equity holders in a second country market may have a different set of preferences. By beginning to trade in different markets, firms may have to adjust their social responsibility policies to be more consistent with the preferences of the new stockholders they are trying to attract. Of course, this could mean that a firm will become either more or less socially responsible, depending on the preferences of equity holders in the markets into which it is entering. Estimating changes in supply and demand for socially responsible investment opportunities is likely to be more challenging when these parameters evolve slowly over time in an economy. In these settings it would not be surprising to see managers change their policies toward social responsibility only very slowly and incrementally. In this way firms can estimate the total demand for and supply of socially responsible investment opportunities in an economy and adjust their own policies accordingly.
Changing the demand for socially responsible investment opportunities Finally, this model also has implications for those interested in increasing the level of socially responsible firm activities in the economy. Thus far, we have assumed that the demand for socially responsible investment opportunities was given, and the task facing firms was to estimate that demand and the relevant supply of these investment opportunities in determining their strategic actions. However, the actionsof [sic] various individuals and groups in an economy could have an impact on this demand. Successful efforts to increase the demand for socially responsible investment opportunities would have the effect of making it in the valuemaximizing [sic] interests of more firms to make such investments. According to the model developed here, the task facing those interested in seeing the level of socially responsible investments made by firms in an economy increased is to engage in activities that change the preferences of potential investors. Marketing campaigns that highlight the social responsibility failures of some firms, the social responsibility successes of other firms, and how investment dollars are used to either help or hurt society may have the effect of increasing the number of people looking for socially responsible investment opportunities in an economy over time. When demand for these investment opportunities increases, value-maximizing managers will find it in their self-interest to begin to make these investments, even if doing so reduces the present value of their cash flows. The model also suggests that direct appeals to managers to increase their level of investment in socially responsible activities without a corresponding increase in demand for these kinds of investment opportunities are unlikely to be successful. Managers have the market enforced responsibility to maximize the market value of their firm. While the model developed here demonstrates that engaging in socially responsible activities that reduce the present value of a firm’s cash flows can sometimes increase a firm’s market value, it can only be expected to do so when demand for these investment opportunities is greater than supply. In this sense, increasing the overall level of demand for these investment opportunities is likely to precede firm decisions to increase socially responsible activities, especially when those activities reduce the present value of a firm’s cash flows. Results In the beginning it could be argued arguing [sic] that efforts to examine how socially responsible activities can increase the present value of a firm’s cash flows do not address a central issue in the corporate social responsibility literature - that sometimes firms should invest in socially responsible activities, even if those activities reduce the present value of a firm’s cash flows. This examination provides an explanation of when investments in these kinds of socially responsible activities will occur. In developing this theory, it is to be suggested that some inves-[tors may have interests besides wealth maximization in making their investment decisions.] |
More recently, various business scandals may have increased demand for socially responsible activities, as investors look to put their money into companies whose management they respect and trust.
Firms can also create their own “exogenous shocks” by becoming more international in scope. While equity holders in one country market may have one set of preferences for investing in socially responsible firms, equity holders in a second country market may have a different set of preferences. By beginning to trade in different markets, firms may have to adjust their social responsibility policies to be more consistent with the preferences of the new stockholders they are trying to attract. Of course, this could mean that a firm will become either more or less socially responsible, depending on the preferences of equity holders in the markets into which it is entering. Estimating changes in supply and demand for socially responsible investment opportunities is likely to be more challenging when these parameters evolve slowly over time in an economy. In these settings it would not be surprising to see managers change their policies toward social responsibility only very slowly and incrementally. In this way firms can estimate the total demand for and supply of socially responsible investment opportunities in an economy and adjust their own policies accordingly. [p. 833] Changing the demand for socially responsible investment opportunities. Finally, this model also has implications for those interested in increasing the level of socially responsible firm activities in the economy (Waddock, 2006). Thus far, we have assumed that the demand for socially responsible investment opportunities was given, and the task facing firms was to estimate that demand and the relevant supply of these investment opportunities in determining their strategic actions. However, the actions of various individuals and groups in an economy could have an impact on this demand. Successful efforts to increase the demand for socially responsible investment opportunities would have the effect of making it in the value-maximizing interests of more firms to make such investments. According to the model developed here, the task facing those interested in seeing the level of socially responsible investments made by firms in an economy increased is to engage in activities that change the preferences of potential investors. Marketing campaigns that highlight the social responsibility failures of some firms, the social responsibility successes of other firms, and how investment dollars are used to either help or hurt society may have the effect of increasing the number of people looking for socially responsible investment opportunities in an economy over time. When demand for these investment opportunities increases, value-maximizing managers will find it in their self-interest to begin to make these investments, even if doing so reduces the present value of their cash flows. The model also suggests that direct appeals to managers to increase their level of investment in socially responsible activities without a corresponding increase in demand for these kinds of investment opportunities are unlikely to be successful. Managers have the market-enforced responsibility to maximize the market value of their firm. While the model developed here demonstrates that engaging in socially responsible activities that reduce the present value of a firm’s cash flows can sometimes increase a firm’s market value, it can only be expected to do so when demand for these investment opportunities is greater than supply. In this sense, increasing the overall level of demand for these investment opportunities is likely to precede firm decisions to increase socially socially responsible activities, especially when those activities reduce the present value of a firm’s cash flows. CONCLUSION We began this paper by arguing that efforts to examine how socially responsible activities can increase the present value of a firm’s cash flows do not address a central issue in the corporate social responsibility literature — that sometimes firms should invest in socially responsible activities, even if those activities reduce the present value of a firm’s cash flows. This paper provides an explanation of when investments in these kinds of socially responsible activities will occur. In developing this theory, we suggest that some investors may have interests besides wealth maximization in making their investment decisions. |
The source is given on pp 58 ff. |
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| [In developing this theory, it is to be suggested that some inves-]tors may have interests besides wealth maximization in making their investment decisions. If the demand for socially responsible investment opportunities generated by these investors is greater than the supply of these investment opportunities, then such investments can create economic value for a firm. However, this consideration also suggests that if supply and demand conditions are not favorable, engaging in the same socially responsible activities can actually reduce the market value of a firm. | In developing this theory, we suggest that some investors may have interests besides wealth maximization in making their investment decisions. If the demand for socially responsible investment opportunities generated by these investors is greater than the supply of these investment opportunities, then such investments can create economic value for a firm. However, the paper also suggests that if supply and demand conditions are not favorable, engaging in the same socially responsible activities can actually reduce the market value of a firm. |
The source is given on pp 58 ff. |
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| It could be wise, if managers sometimes abandon efforts to maximize the present value of their firm’s future cash flows in favor of socially responsible activities that reduce the value of those cash flows. Obviously, identifying socially responsible activities that increase the present value of a firm’s cash flows is interesting in its own right. However, no new theory is required to explain why firms will pursue such activities, once identified. Such actions are consistent with received economic and financial theories of firm behavior. But new theory is required to explain why firms might pursue socially responsible actions that reduce the present value of their cash flows. Focusing only on these situations helps develop this critical aspect of the theory of CSR. | In this way the model focuses on a central theoretical issue raised by those who study corporate social responsibility— that managers should sometimes abandon efforts to maximize the present value of their firm’s future cash flows in favor of socially responsible activities that reduce the value of those cash flows.
Obviously, identifying socially responsible activities that increase the present value of a firm’s cash flows is interesting in its own right (Godfrey, 2004; McWilliams & Siegel, 2001; Waddock & Graves, 1997). However, no new theory is required to explain why firms will pursue such activities, once identified. Such actions are consistent with received economic and financial theories of firm behavior. But new theory is required to explain why firms might pursue socially responsible actions that reduce the present value of their cash flows. Focusing the model only on these situations helps develop this critical aspect of the theory of corporate social responsibility. |
The source is not mentioned. This passage has been used already 11 pages further up: Fragment 058 01 |
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| In general, firms can take three different actions with respect to their socially responsible activities: firms that currently do not engage in these activities can begin doing so; firms that currently do engage in these activities can stop and firms can maintain their current policies — that is, those that currently engage in socially responsible activities can continue to do so, and those that currently do not engage in such activities can also continue to do so. Each of these different activities can have an effect on the market value of a firm, depending on the context within which these activities take place. It can be suggested that the most important determinant of the impact of these activities on a firm’s market value is the relative supply of and demand for opportunities to invest in socially responsible firms in an economy. With Mackay, Mackay and Barney[21b, p.823,824] three possibilities exist again: demand for socially responsible investment opportunities may be greater than their supply, supply for these investment opportunities may be greater than demand, and demand for these opportunities may equal supply. | In general, firms can take three different actions with respect to their socially responsible activities: (1) firms that currently do not engage in these activities can begin doing so; (2) firms that currently do engage in these activities can stop; and (3) firms can maintain their current policies — that is, those that currently engage in socially responsible activities can continue to do so, and those that currently do not engage in such activities can also continue to do so. Each of these different activities can have an effect on the market value of a firm, depending on the context within which these activities take place.
Equation 9 suggests that the most important determinant of the impact of these activities on a firm’s market value is the relative supply of and demand for opportunities to invest in socially responsible firms in an economy. Again, three pos- [page 824] sibilities exist: (1) demand for socially responsible investment opportunities may be greater than their supply, (2) supply for these investment opportunities may be greater than demand, and (3) demand for these opportunities may equal supply. |
The source is mentioned, but only for the last passage. |
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